Newsbank
The pros and cons of going for freehold
Acquiring the freehold of a block of flats can be a good idea, but it can also be an expensive and difficult process.
The advantages to leaseholders are obvious and convincing.
Firstly, it means they can manage the building themselves, hopefully for less money than they were being charged by their landlord.
Secondly, they can grant themselves 999 year leases, which is particularly useful if the existing lease is close to or at the point at which lenders will not give mortgages. But just because it's a good idea doesn't mean that it's easy.
There are two ways of buying the freehold.
The first is landlord-lead and is covered by the 1987 Landlord and Tenant Act. If the landlord wants to sell, he or she has to offer the leaseholders first option. If the leaseholders are interested they can form a steering committee, set up a company, and accept the offer. If the leaseholders aren't interested, the landlord can sell the freehold elsewhere but not for a price lower than he offered the leaseholders.
Under the 1993 Leasehold Reform Act, leaseholders can initiate the process. This is where it can get complicated. To be eligible, the residential block must be no more than 25 per cent commercial, and two thirds of all the flats in the building must be let on long leases. If a person or company owns two or more flats, then such flats are not included in the two-thirds figure required.
Assuming the leaseholders meet the basic criteria, they again need to set up a steering committee and form a limited company, usually with three or four directors. It's a time-consuming process, so needs people with a great deal of drive and time - someone who has recently retired is often a good idea.
Interestingly, the purchase can proceed with only 50 per cent of leaseholders in agreement: there's no current obligation to let everyone know and allow them to join in, though that is likely to change. All leaseholders who do sign up to the deal need to be locked in to it legally. Once the process begins, expenses will begin to mount up straight away and the steering committee will need money on account.
Chief among the expenses will be the fees of a solicitor and a valuer, both with experience in this field. It will be the valuer's job to come up with a suggested purchase price for inclusion in the initial notice to the landlord.
Once the initial notice has been served on the landlord, he or she has two months to respond and will almost certainly put forward a higher price.
If the figures are a long way apart, the valuers on both sides will try to reach a compromise: if they can't a tribunal will impose the price instead.
Note that the price reflects the value of the freehold at the date the initial notice was served, and will not be affected by a rising or falling housing market.
For further information contact Alison Barr.
The information given in this article is of a general nature only and should not be considered as advice applicable to any particular situation for which specific request should be made to us.
